German Cooperative Banks Face Mounting Pressure as Volksbank Brawo Falters

The struggles of Volksbank Brawo are highlighting broader stress within Germany's cooperative banking system, where a number of institutions are facing consequences from riskier lending and investment strategies pursued during the low-interest-rate era, according to a Bloomberg report on Saturday.

Volksbank Brawo's Troubles

Volksbank Brawo, a regional cooperative bank, has indicated it may need to write down the value of some assets and is considering seeking support from the sector's mutual protection fund. The move follows the departure of its long-time CEO, Juergen Brinkmann, in May.

Over his 15-year tenure, Brinkmann expanded the bank into a sprawling conglomerate encompassing finance, real estate, and investment holdings. The bank's current difficulties underscore the risks embedded in this rapid expansion as financial conditions tighten.

Sector-Wide Strains Emerge

The situation at Volksbank Brawo is not an isolated incident. It is one of more than six German cooperative banks to seek assistance from the sector's support scheme in recent years. Rising interest rates, an increase in borrower defaults, and the repricing of assets have exposed vulnerabilities across the system.

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Signs of mounting pressure include:

• A surge in problem assets being transferred to the sector's joint bad bank, BAG Bankaktiengesellschaft. Last year, over €1.2 billion in non-performing loans were sold to BAG, a two-decade high and a sharp increase from approximately €230 million the previous year.
• DZ Bank, a central institution for the sector, expects its contribution to the rescue fund to nearly double this year to €117 million from a prior €59 million.

Context and Response

Germany's cooperative banking sector is a significant part of its financial landscape, with a combined balance sheet of €1.7 trillion ($2 trillion) last year, exceeding Deutsche Bank's €1.4 trillion. The system includes about 650 banks that mutually support each other through a protection fund, which has provided over €1 billion in aid in recent years.

Despite the pockets of distress, the sector remains profitable overall, reporting a pre-tax profit of €11.6 billion last year. In response to the growing challenges, the cooperative banking group approved reforms to its protection scheme in June, aiming to strengthen oversight and allow for earlier intervention when member banks face financial trouble.